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Here's a money secret that might keep you from driving yourself crazy: You can't do it all.

We're supposed to max out our retirement savings, pile up huge emergency funds, pay off all our debts and buy tons of insurance. Yet we've also got other bills to pay, kids to raise and, yes, fun to have.

Even in good times, many of us can't cover all the bases perfectly. Now that many are also coping with pay cuts, unemployment or unpaid furloughs, more of us are facing painful trade-offs on less income.

Here's what you need to know now to properly prioritize your spending and manage your money. You may not be able to cover everything right away, but as more money comes in you can work your way down the list and be reasonably sure you're getting the important stuff right.

Priority No. 1: Pay your bills

Obviously, you need to keep a roof over your head and food in the fridge. But your ability to manage all your other financial priorities will be greatly enhanced if you can get a handle on your basic living expenses.

Harvard professor and Bankruptcy expert Elizabeth Warren, now running for a U.S. Senate seat in Massachussets, recommends limiting your "must-have" bills to 50% of your after-tax income. Must-haves, as she wrote in "All Your Worth" (co-written by her daughter Amelia Warren Tyagi), include shelter, utilities, transportation, food, insurance, child care and minimum loan payments.

Image: Liz Weston

Liz Weston

Her plan leaves 30% for "wants" such as new clothes, entertainment and vacations, and 20% for savings and debt repayment.

If your must-haves balloon to more than 50% of your after-tax pay, you may be able to rein in your costs by trimming your food bills and lowering your home's thermostat. If not, you may have to make more painful adjustments, such as finding a cheaper place to live or getting rid of a too-expensive car.

What you shouldn't do is cut your insurance coverage. Shopping around for coverage and choosing higher deductibles are better ways to lower costs than dropping your policies altogether, because that can leave you exposed to catastrophic expenses from accidents, illness or lawsuits. What you need:

  • If you have a car, you need liability coverage, at least. Comprehensive and collision insurance is a good idea on newer cars and may be required by your lender.
  • If you own a home, homeowners insurance is essential. Make sure you have enough coverage to rebuild your home, plus adequate liability insurance ($500,000 is good, and more is better).
  • If you rent, renters coverage is a smart buy. Your landlord's policy doesn't cover your stuff or your liability.
  • Health insurance is a basic expense you shouldn't forgo if you have any choice, because a single accident or illness can bankrupt you.
  • Life insurance may be an essential, but only if you have financial dependents (people who need your income to survive). Term insurance is the usually cheapest way to go.

If your income isn't stretching far enough to cover your must-have bills, consider a consultation with a bankruptcy attorney.

Priority No.2: Save $500

Just a few hundred bucks in the bank can eliminate expensive bounced-check and late-payment fees. Having $500 in the bank also allows you to pay for minor emergencies without adding to your credit card debt. Furthermore, there's a huge psychological advantage to having even this small cushion.

Eventually, you'll want a bigger stash to guard against financial setbacks, but $500 is a good initial goal. Set up an automatic transfer from your checking account into a high-yield savings account, or jump-start your savings with a windfall, such as your tax refund check.

Priority No. 3: Start saving for retirement

You may be surprised to see retirement so high on the list. Surely your credit card debt and your kids' college educations are more important.

Except they're not. You have only so many working years to set aside enough cash to last you for the rest of your life, and any delay in getting started will cost you big time. Waiting just five years to begin can reduce your total nest egg by as much as 30%.

Stopping or reducing your contributions is another bad move. It may be hard to contribute when markets are so volatile, but it's still important if you hope to build a nest egg.

But how much should you save? I've previously suggested that you put away 10% for basics, 15% for comfort and 20% to escape. If you start saving for retirement by your early 30s, putting aside 10% of your income should cover your basic expenses in retirement, while a 15% contribution rate should give you a more comfortable nest egg. A 20% rate should allow you to retire early or enjoy luxuries such as extensive travel.

What if you can't manage even 10% right now? Then:

  • If your 401k still offers a match, contribute at least enough to get that.
  • If there's no match, start by contributing whatever you can, and bump it up a percentage point or two whenever you get another raise.
  • If you don't have a retirement plan at work, contribute to a traditional individual retirement account. You can contribute up to $5,000 a year if you're younger than 50 or up to $6,000 if you're 50 or older, and your contribution is tax-deductible.
  • Need some inspiration to put the money aside? Think about how hard it is to live on your current income. Now image living on about $12,000. That's the typical Social Security benefit, and it's all you'll get if you don't start saving.

Priority No. 4: Pay off 'toxic' debt

Now it's time to tackle your credit card bills and other dangerous debts, including payday, car title and pawnshop loans.

Debt is toxic if:

  • The lender can change rates and terms at any time, with little or no provocation.
  • The standard or default interest rate is in the double digits, or higher, which typically prolongs the time you remain in debt.
  • Initially easy payment terms encourage you to rack up more debt than you can comfortably repay.

The best way to pay off toxic debt is usually to target the highest-rate debt first, paying as much on that as possible while paying the minimums on your other debts. But you also could tackle your smallest debt first, just to give yourself the psychological boost of retiring a bill. (For more on this, see my column "A debt payoff plan that works.")

Priority No. 5: Bolster your emergency fund

With job losses everywhere, the perils of living paycheck to paycheck are obvious. And your $500 cushion will disappear fast if you lose your job.